Facts on Silver

For those who missed my piece of March
25, 2011, here is the link.
I asked the question, "Is Silver Topping?" I may have
been right about silver topping, only time will tell. For certain
I was dead wrong about the timing and the price. Silver has rocketed
from $38 and change when I wrote the piece to over $47 now.

But lots of people get lots of things
wrong about silver. So here are some facts.

1.
Silver is going parabolic.

According to Jim Rogers all
parabolic moves end badly. I have seen similar charts in
all kinds of commodities and they always correct. Parabolic charts
mark tops. So when silver bugs start suggesting, "This time
it's different" I know better.

Study the chart below. Ignore the commodity.
When charts go parabolic, it ends badly. I was an investor in
the 1970s in both gold and silver. I started buying gold at $35
and silver around $5 an ounce. I sold out all my silver in January
of 1980 a week too early at $35 as it rocketed to $50.25 an ounce
at the open on January 21, 1980. It went parabolic and basically
that's all you need to know.

Those investors who want to buy at new
all time highs almost always are the same investors who want
to sell at all time lows. Naturally as a guy running a metals
site, I think $46 silver is wonderful for all my readers that
I was telling to buy at $4 and $6 and $10 and $20. Is silver
a good buy today? No, it's a good sale... to those who insist
on buying at tops.

2.
The actual ratio of silver to gold in the earth's crust is not
16 to 1.

It's more like between 20 or 26 or 64
to one. This is not an absolute fact, these are opinions from
experts but no experts conclude the ratio is 16-1. Go
to Wikipedia and do the math for yourself.

What happens on the web is that one guy
starts a rumor saying there are tens of thousands of gold-plated
tungsten bars out there. Some other fool adds a few "facts"
to the rumor and all of a sudden hundreds of sites are writing
about fake gold bars.

Alas, years later not a single tungsten
bar has showed up. It was rubbish and anyone who understood anything
about metalworking would understand that technically it would
be very hard to do. All 400 ounce gold bars are tracked and if
by some strange process someone managed to counterfeit one, he
would be caught at once. But you can sell a lot of subscriptions
to those who pay to have their fantasies catered to.

It doesn't matter how many people claim
the ratio of silver to gold is 16-1, it simply isn't true.

3.
There is no shortage of silver. There never has been a shortage
of silver. Until the laws of supply and demand are repealed,
there never will be a shortage of silver.

The first person I ever read that claimed
there was a shortage of silver was Ted Butler. He claimed in
May that according to his figures the world was going to totally
run out of silver by December. This was on the Kitco forum. I
wrote and told him he was dead wrong, there were billions of
ounces of silver above ground. His response was that according
to his numbers, we would be out of silver bullion and that would
drive the price of silver all by itself to between $50 and $100
an ounce. In a vacuum. Without gold going up or oil or anything
else going up because of inflation. Silver was that rare.

My retort was that with billions of ounces
around, prices would soon turn Grannie's silver service into
silver bullion. He insisted I didn't know what I was talking
about; he was the silver "GURU." The exchange took
place in May of 2001 and by December of 2001 I had correctly
called the bottom in silver while he was insisting that it would
be $50 an ounce. One of us was dead right.

But then he was also the guy claiming
that silver was the most critical war material and if we ever
go into a war, that would drive silver prices to between $50
and $100 an ounce and it was so rare that you should, "never,
never, ever sell silver." With the US engaged in three different
wars at the same time, you would think that silver would be $300
an ounce. It's not.

My question is, "If you were smart
enough to buy 100 ounces of silver at $4 an ounce, a 5000-year
low in real terms, how much profit have you made if silver goes
to $50 or $100 or $300 and you never, never, ever sell? The answer,
of course, and ignored by all the silver "GURUS" is
that if you buy low and don't sell ever, you don't make any profit.
That may be the dumbest investment advice I have ever heard.

Silver is a commodity like any other.
If you are smart enough to buy it cheap and you are smart enough
to sell it when it gets expensive, you will profit. If you want
to buy at all time highs, good luck with that.

Just how accurate is the 19 billion ounce
figure? We can figure that out with simple logic. I think the
figure accepted by more people for total silver production ever
would be about 45
billion ounces. A favorite argument of the permabulls is
that silver is consumed, not recycled. Let's think about that.
Silver is used in computers, iPhones, aircraft, and lots of commercial
purposes where it isn't recycled. But that use of silver wasn't
common until perhaps 1960. Silver before that time was recycled.
Yes, silver coins did wear but they didn't wear out, they might
lose 20% of their original weight.

If 45 billion ounces were produced, it's
more logical that a good percentage of it is still around. I
was in my coin dealer's shop a week ago. He bought 2800 ounces
of silver on Saturday. Not a bar of bullion in the bunch but
2800 ounces of real silver in other forms. The numbers on silver
are not hard numbers; we simply don't know how much silver is
around. But we do know there is a lot of silver and with the
exception of a short period between the end of November of 1979
and January 21 of 1980, a mere six weeks later, silver has been
well under $10 an ounce on average for the last 40 years. How
rational is $46 silver? Not very.

I'd guess most silver mines have cash
costs between $3 and $10. A market price of $46 an ounce will
suck silver out of grannies' closets and out of the ground at
the same time. Every silver refinery in the world is running
at capacity right now, if you want silver, there is a lot of
it around.

4.
The most illogical thinking and worst use of "facts"
is common among the silver uberbulls and the parrots that follow
them.

Someone just posted the most incredible
theory on the validity of SLV. That's the silver ETF that has
been trashed for years by a small group of uberbulls with an
agenda. One of their supporters came up with a brilliant argument.
Since we don't really know and can't prove that SLV actually
has all the physical silver, the proof that it is a scam is when
they deny it being a scam. Read that carefully. The
proof that it is a scam is when they deny it.

So, apparently, if you ask the people
behind SLV if it is a scam and they admit it, that means we know
it's a scam since they admitted it. And if you ask the people
behind the SLV if it is a scam and they deny it, that also means
it is a scam because the proof is when they deny it.

I think that's circular logic. No matter
what the people behind SLV say, it's a scam.

I have said in the past I have reservations
about ETFs and I think investors should be aware of those reservations.
If we have a total economic collapse and the financial system
freezes, all ETFs could be frozen or worse for months. That includes
Sprott's paper silver, the CEF and SLV and all ETFs of all sorts.
What happened in Argentina could happen in the US, it could happen
all over the world. It's entirely possible that all banks close
for a good period of time, after all they are insolvent now and
have been since September of 2008. But a financial freeze would
affect all forms of paper silver including Sprott's silver trust.

The CEF fund and the SLV have done more
to improve the price of silver and gold than any other single
action in the last 50 years. Silver bugs should be grateful SLV
holds 366 million ounces of silver instead they are whining and
posting simply absurd articles totally lacking in either facts
or logic.

When someone posts something that ridiculous
and lacking in logic, you may safely presume they don't know
what they are talking about. That's real common when people write
about silver and it's going to cost investors a whole lot of
money.

The daily bullish consensus on silver
is 96% as of Wednesday the 20th of April. On January 21st of
1980, the very day of the top, the bullish consensus was 94%.
How many of the silver uberbulls are suggesting that maybe the
record high bullish consensus is suggesting a very dangerous
time to start buying? The answer is damned few because they have
an agenda and their agenda doesn't involve them knowing what
they are talking about. As long as they tell investors what they
want to hear, they will be very popular.

5.
There cannot be a run on Comex. The rules do not allow the chance
for a run.

For years I have watched as each time
silver runs up, certain people start spreading rumors that silver
is in such shortage that there will be a run on Comex. The only
problem with the rumor is that it can't possibly happen. There
cannot be a run on Comex. I repeat, there cannot be a run on
Comex.

Part of the reason for the rumor is that
most investors confuse the purpose of the exchanges. The purpose
of the exchanges is not to exchange commodities. The purpose
of the exchanges is to determine price. But certainly the possibility
of a run on an exchange is possible so early on the exchanges
adopted rules that called for cash settlement if necessary.

Most people don't know this because they
don't read the small print but if you have a savings account,
the bank has the right to withhold payment for up to 90 days.
And all mortgages are essentially 90 notes at their heart. That's
right, the bank can demand full payment within 90 days if they
wish and during the 1930s that's how thousands of Americans lost
their homes even when they were paying their mortgage.

I don't write the rules and you don't
write the rules and they are what they are if you like it or
not. There cannot be a run on silver, it's impossible. So anyone
writing about it is spreading disinformation. Of course anyone
who ever passed a Series 7 exam know this but you will never
hear the silver uberbulls mention it. I wonder why.

There are three guys in the mining business
that are so smart and have such great track records that for
70% of investors in metals, they should buy into their mutual
funds and stop trying to outsmart the market by picking stocks.
The top three guys in the industry are Ken
Gerbino, Eric
Sprott and Frank Holmes.
If you like metals and shares in resource stocks, stop trying
to be so smart yourself, it's difficult work. Hand your money
to them to invest in one of their funds and you will do just
fine.

That said, Eric Sprott seems to have
done something that hasn't happened to the market since the days
of Johnny Carson. You have to be getting on in age to remember
it but back in 1973 Johnny Carson started a toilet paper shortage
that lasted a month. He was making a joke. He
said that there was a toilet paper shortage. The next day,
millions of rolls of toilet paper flew off the shelves of every
store in the US and by noon there was no toilet paper to be had.
It was nothing but a joke.

Don't let anyone convince you that supply
and demand doesn't work. They do work and that's far more important
for you to know than belief in some mysterious manipulation conspiracy
theory. I've heard all the stories and know all the arguments.
No one in history has made a cent from a belief in market manipulation.

If gold has gone up 4100% since 1950,
higher than any other commodity, anyone manipulating it down
has done a piss poor job. And who cares if 4 guys have sold more
silver short than exists in the known universe? Those are all
interesting theories but that's all they are. If you don't buy
low and sell high, you can't make money. End of story.

Eric Sprott started his own paper silver
fund called the Sprott Physical Silver Trust. It's still paper
silver like SLV or the CEF fund. It has some unique features,
not benefits but features. He has done a brilliant job of promoting
it.

Recently he purchased $300 million dollars
more physical silver to put in the closed fund. As a result of
his excellent promotion, as of last Wednesday, silver was selling
for $46. If you bought the CEF silver fund, you paid $47.88 for
silver. If you bought SLV, you paid $46 with no premium but if
you bought PSLV, the Sprott Silver Trust, you paid an incredible
$57.73 an ounce for silver.

I'd say that Eric Sprott buying $300
million dollars more silver lately was incredible timing. He
pocketed probably $60 million in profit. Is Eric Sprott bullish
on silver? I'd say so. He has 60 million reasons to be bullish.
He can buy at the exact top of silver and watch a 25% decline
and still make money.

How wise was it for investors to pay
a 25% premium for silver? I'd like to believe my readers are
smart enough to figure that out for themselves. Eric Sprott is
both brilliant and rich but paying 25% over spot is not wise
investing.

The Hunt Brothers investing in silver
drove silver to $50.25 an ounce for a few minutes on January
21, 1980. I think it would be fair to credit the silver boom
of 2011 to Eric Sprott. He's not really saying anything new about
silver, though, Ted Butler was claiming that we were about to
run out of silver 10 years ago and claiming that silver was the
most manipulated of all metals long before Eric Sprott bought
his first ounce of silver for a fund. But Eric Sprott adds credibility.
But we weren't running out of silver ten years ago. We aren't
running out of silver now.

One of two things is going to happen.
Either we are at a top and silver is about to crash both hard
and long, or the world's financial system is about to fall apart.
I have been an advocate of a total financial crash for a lot
longer than most writers. I was writing about the dangers of
derivatives in 2002 when they were 15% of what they are now.

But I don't believe the world's financial
system is going to crash next week. As in January of 1980, the
silver bulls are going to be the ones losing money. You can't
profit if you don't sell and all the permabulls are screaming
"Buy, buy, buy." As they will at every top. Buying
at record high prices is rarely profitable. But perhaps this
time it really is different.

Here's what all potential investors in
silver need to know.

The chart of silver has gone parabolic.
Parabolic charts mark tops no matter what the commodity..

The bullish consensus on silver is at
a record high. Record high bullish consensus on any commodity
is common at tops..

When the most credible guys in an industry
start explaining why supply and demand don't really work, it's
a top. With 19 billion ounces of silver above ground we aren't
about to run out any time soon..

When guys start writing about silver
that didn't have a clue as to what it was or what it was used
for at the bottom, you are at a top. I'm astonished at both the
ignorance and the arrogance of the newly invented silver "Gurus.".

When the smartest guys in an industry
start telling you, "This time it's different," it's
not. It's just a top.